Market report: Outsourcing probe shock

11 July 2013, 11:35

Shares in service giants Serco (SRP) and G4S (GFS) were hit by a probe into billing practices for electronic tagging work. All government contracts held by the two companies will now be reviewed, prompting analysts to downgrade earnings forecasts. Serco fell 8.6% to 622p and has decided not to re-bid for electronic monitoring work. There's also a delay to a decision on giving Serco a contract to run prisons in South Yorkshire. G4S fell 5.1% to 214.2p.

Westhouse analyst Michael Donnelly repeated an argument made since last year that outsourcing had become a 'far more hostile environment than it had been for some time, or than some commentators appeared to believe’. Liberum analysts Joe Brent and William Shirley have slashed Serco's 2014 earnings per share forecasts by 3% to reflect the loss of electronic monitoring work. The existing contract, worth £50 million per year at 20% margin, will end this year.

Gold miners bounced back into the market's favour after US Federal Reserve chairman Ben Bernanke yesterday said he would back sustained monetary stimulus for the foreseeable future. Gold has been steadily fallen on signs that quantitative easing would be withdrawn from the US amid economic recovery. This led investors to believe that gold, as an asset to own during times of economic and political strife, was no longer a necessary holding.

The precious metal jumped 3.1% in value, just shy of $1,300 per ounce. But can it stay in favour for long? All signs point towards US economic growth – once we get proof of jobs growth, there could be a significant sell-off in gold once again.

For now, investors are piling into the depressed gold equity scene, led by an 18.6% rise in Petropavlovsk (POG) to 79.75p. Close behind is African Barrick Gold (ABG), up 11.1% to 109.3p and Fresnillo (FRES) advancing 10.7% to £10.

Aside from the rebounding miners, the FTSE leaderboard includes a 7.8% rise to 379p from financial services group Ashmore (ASHM). Read our story on today's announcement here.

A 10-year marketing services contract winhas provided the catalyst to reignite Communisis' (CMS) share price, up 22% to 66.5p as it secures a long-term deal with Lloyds Banking (LLOY). Read our story on the contract win and recent 'griller' article outlining the stock's attractions.

Associated British Foods (ABF) nudged ahead 6.2% to £19.28 after sayingthat its budget fashion chain Primark has grown sales by 22% in the year to date.

Among the fallers is construction equipment hire provider Lavendon (LVD), the stock down 3.3% to 155.25p as a trading update flagged good and bad news. Gain in the Middle East are being offset by weakness in the UK – its core region for profit generation.

Investors made a dash for mobile content and marketing specialist InternetQ (INTQ:AIM), up nearly 8% to 332p, after posting a bullish trading update. It shows over 30% revenue growth, all organic, and its recent £10 million fund raising will provide fire power for more of the same. Shares has been a long-run fan, flagging the potential in March last year at 204.5p (page 10), so 62% up inside 15 months.

Shareholders get the inevitable bounce at satellites operator Avanti Communications (AVN) after its massive revenue miss shock yesterday. That plunged the stock to near five-year lows of 145p, but they rebound close on 18% today to 171p.

Microcap education and government electronic procurement specialist @UK (ATUK:AIM) jumped over 10% to 10.62p on a bullish note from house broker Westhouse Securities. The City number crunchers reckon the shares are worth 25p, according to their a discounted cashflow (DCF) model. This follows a 16% hike in the shares last Friday, after the company's upbeat AGM update.

After years of struggle risk management minnow Active Risk Management (ARI:AIM) finally surrenders to a buyout. Fighting an uphill battle against scale limitations, being part of a bigger group looks best and the takeout price of 35.2p per share is 51% higher than yesterday's 22.5p close. Interestingly, £25 million peer Lombard Risk Management (LRM:AIM) rises over 3% to 11.5p with speculators predicting that it could be next on the takeover trail.

Packaging firm API (API:AIM) fell 3.6% to 67p after warning of a slow startto its financial year ending 31 March 2014. Although it maintained it would hit expectations for the period, this is predicated on a stronger second-half performance.

Conventional and unconventional oil and gas play Falcon Oil & Gas (FOG:AIM) – which slicked up 2.2% to 14.2p – pleased the market by tidying up its portfolio. It agreed a deal with investors in its Australian subsidiary which will give it 96.9% stake in Falcon Oil & Gas Australia and its acreage in the Beetaloo basin.

An otherwise upbeat trading updatehelped midcap oil firm Premier Oil (PMO) to a 2.9% rise to 352p despite guidance for 2013 output declining from 65,000 to 70,000 barrels of oil equivalent per day (boepd) to 63,000 boepd. The shortfall has been attributed to delays on field developments which Davy analyst Caren Crowley says have already been 'discounted in the share price'.

Dermatology play Sinclair IS Pharma (SPH: AIM) jumped 11.7% to 26.2p after management reported stronger-than-expected operating cashflow. Management has the scope to look at new acquisitions after the company’s net debt fell to £6.8 million from £9.1 million in the 12 months to July. Growth was driven by a 9% revenue improvement in its dermatology business, which accounted for 80% of the London company’s revenues. Read our article on Sinclair from February.

Market Overview

FTSE 350 Risers and Fallers

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